“I believe that business has the responsibility to be in service to social, environmental and economic justice - one way to do that is to design equity into the financial systems up front so that they create the space for thrival, not just survival.”

And which type of investor you will be pitching your company to depends on your exit strategy.

If you’re looking to sell your company lock, stock and barrel, that’s one type of exit. This could be a sale to your kids because you want to keep the business in the family, to another company who wants to expand their market share, or to an individual who wants to buy a mature, proven business.

If you’re looking to “go public” in an IPO (initial public offering), that’s another. This is where angel investors and venture capitalists come in. These guys, and they are mostly guys, are accredited investors–high rollers looking to gamble and win big.

And if you’re not looking to go public but want long-term investors to grow, that’s yet another. DPOs, or direct public offerings, involve unaccredited investors who are aligned with the mission of the company, kinda like crowdfunding but different.

The good news is that no matter what type of investor you’re engaging with, or what your exit strategy, as I mentioned in last week’s post, getting “investor ready” involves the same elements:

Good financial records.

Complete business plan.

Financial projections.

Solid management team.

Whether you are pitching to an angel, a VC, a family member, or a buyer, it pays to know what all they are looking for. Because different types of investors are focused on different aspects. The bank is interested in past performance and collateral. An investor is interested in the future and who you are: the jockey, not the horse. Both are interested in past and future; however, each places their emphasis on different parts of the picture.

Your CFO can prepare the information they want in the way they expect to see it. Investors want to see the numbers, and they want to see how you are going to reach those numbers. They want to see how they are going to get a big return on their money. And it gives investors comfort to know that you are working with a financial professional; it demonstrates to them that you know enough of what you don’t know to get the right support.

They want to see your financial history, so this means you have to have up-t0-date financial records.

They want to see your written plan on how you expect to get where you want to go, so this means you have to have a business plan that details every aspect of how you run your company: marketing, management team, financial projections, and production.

No matter what your exit strategy, working with a CFO is essential to your business health and growth. What to know more about how CFO services might help your business? Take the first step and schedule a time to talk with me about how I can help you get your business “investor ready.”

You’ll never find a company with positive cash flow and profitability in bankruptcy court.

Just won’t happen.

Let’s start with profitability. Whatever it is that you are selling, you have to be selling it for a/ more than what it costs to make and b/ more than what your overhead is. In other words, you have to have a bottom line that is in the black.

If you don’t, then that’s the first thing to fix by some combination of:

raising your prices

lowering your costs

increasing your sales volume.

There are two major break points in your business model: the gross profit (your sales minus your costs of goods) and the net profit (the gross profit minus the overhead expenses.)

The gross profit has to be in the black, otherwise you’re not in business but running a charity. And your gross profit has to be enough to cover your overhead expenses to get you to a net profit that also has to be in the black.

So say you are profitable, but you find yourself in a negative cash flow situation from time to time. Let’s look at some possible reasons for this happening and what the fixes are:

You manufacture a product or provide a service that require costs that you have to cover before you get paid by your customers.

This is the easiest fix of all. Get some financing from a bank or from investors. More on what all you need to get “investor ready” in next week’s blog post.

You have customers that are slow payers, so you’re making the sales, but the cash is slow in coming in.

get deposits from your customers

get serious about collections.

You have a seasonal business and most of your cash comes in all at once.

set aside a reserve account to carry you over the dry months.

defer expenses and capital expenditures into months more flush with cash.

You show a profit on paper, on your Profit & Loss, but you’re making lease payments on equipment or financing a line of credit.

this is a marketing fix…you just have to get more sales volume, either more customers or sell more to the customers you have.

When it comes to maintaining a sustainable business, there are two things you need to have in place: profitability and cash flow.

When you’re wanting to increase your profits and balance out your cash flow, I can help you get there. It’s just a question of honing in on the particular area specific to your situation and applying the appropriate remedy.

Would love to hear about your current challenges in the comments below.

June, a recent client, told me that she wasn’t sure that she was doing things right when it came to the financial side of her business. When I first told her what I did for small business owners, help them get more profitable through accounting and finance, her eyes glazed over. Here’s exactly what she said to me, “I don’t know what I don’t know. Numbers scare the shit out of me.”

But here’s the thing, she already knew A LOT! She knew that there were things about financial operations and management that she really needed to know in order to grow her business profitably, and that she wanted to know what those things were, then understand them.

So here’s how I broke it down for her.

Think of your financial operations as a pie divided into three slices, like this:

photo by Monique Lusse, 2017

Anything you do in your business falls into one of those three categories: strategy, execution, analysis. Of course, each has sub-categories, and they have sub-categories, and those are covered in other posts; for right now, let’s just think about the meta view.

Here they are defined:

Strategy – how to think about what you want to do. This is about your ideas; it’s where you do research, examine your options, then pick one.

Execution – how to do what you strategized about doing. This is about hands-on implementation of that one option, making the idea a reality.

Analysis – how to interpret the results of the execution of the strategy. This is where you crunch the numbers and turn the data into information.

And then you do it over again in another round based on output from the first round. That’s right: rinse and repeat. The cycle never ends as long as you’re in business. It’s a constant iterative process.

When I laid out these three concepts to June, she let out a deep breath and smiled. “Oh, that’s so simple. I get that. I thought it would be much more complicated and I’d need an MBA to understand it.” she said. “It’s not so scary after all.”

Remember, anything you do in your business is either strategizing, executing, or analyzing. The trick is to do them in sequence. Strategize first, then execute, then analyze. And depending on the project at hand, this process can take 10 minutes, 10 hours, or 10 months.

Let me ask you…what area are you stuck in or confused about right now in your business? Ask me in the comment section below and I’ll be happy to unpack it for you.

How do you account for those large equipment purchases, like a desktop computer or a laptop? Do you expense it (take the full deduction now?) Or do you capitalize it (carry it as an asset on your books and depreciate it over time?)

It’s not a straightforward as you might think. There are rules about this and it behooves you to know what they are.

Two rules about rules:

• Rules are meant to be broken.

• There’s an exception to every rule.

The second certainly applies when it comes to the IRS. You don’t want to knowingly break a rule. That’s not creative accounting, that’s fraud…which will get you free room and board courtesy of the federal government

Making a mistake is OK; you’ll get slapped with penalties and interest and you can sleep in your own bed. The information herein will help you stay on the straight and narrow.

Just a brief caveat before we start: what follows here applies to physical things only, things that are “tangible,” things that you can touch. Different rules apply for “intangibles,” which most small businesses don’t need to concern themselves with. Stuff like “intellectual property” or “goodwill.”

RULE #1: If the tangible item has a “useful life” of more than one year, then you have to “capitalize” and “depreciate” it. And the IRS determines what that useful life is.

• Example: a laptop computer has a useful life of 5 years and you must depreciate it over that period of time. You have your choice of depreciation method (straight-line, accelerated, sum-of-year, double-declining-balance,) but you still have to depreciate it over 5 years.

o Exception #1: IRS Section 179 — which came about as the result of the Economic Stimulus Act of 2008 in order to incentivize business to purchase new equipment and software, thereby stimulating the economy (or so the theory goes) allows you to take the full deduction of new equipment and software (up to $500,000 per year) in the year you purchase it.

o Exception #2: if the item has a value of less than $500, most accountants will expense it because the cost of tracking that asset over its useful life is just too burdensome, time consuming and costly. And the IRS agrees with that. So an external hard drive would last more than a year (hopefully) but cost less than $500, so it’s just worth everybody’s time to expense that puppy.

RULE #2: If a tangible item is going to be used up within the next twelve months, then you can “expense” it. These types of expenses are called “consumables.” Paper clips, copy paper, pens.

While Section 179 is available, it doesn’t mean that you have to take it. Why would some companies not avail themselves of this tax advantage? Because it decreases their bottom line, their net operating income, their profit. And there are lots of reasons why a company would want to show more rather than less profit, like trying to qualify for a loan or a line of credit, for example.

So there you have the basic rule of thumb about when you can expense a purchase and when you have to capitalize and depreciate it.

Hope that helps. Please let me know if you have any questions about this by hitting me up in the comments below.

The “breakeven point” is that point when your revenues equal exactly your expenses. It’s the still point between profit and loss. When your bottom line = $0.00. When what comes in is what goes out. No profit. No loss. When the scales balance.

Here’s why the breakeven point is such a useful metric. It tells you how many units of whatever it is that your sell you need to move in order to cover your costs. It’s a predictive metric; you use it when you want strategize future activities.

You need to know three things in order to calculate the breakeven point: the sales price of the product, the cost to make the product, and your overhead expenses.

Say your make soap and your sell each bar for $8.00.

You know that it costs you $3.00 in raw materials and labor to make each bar.

That leaves you with $5.00 per bar of soap left over. This is your Gross Profit, btw.

Then you need to know what your operating expenses are for one year. Let’s say that’s $75,000 for twelve months of rent, salaries, website, depreciation, and sales and marketing.

If you sell 15,000 soap bars at $8 each, you bring in $120,000 in Gross Revenue.

Your Cost of Goods Sold is $3 x 15,000 for $45,000.

Your Operating Expenses are $75,000.

$120,000 – $45,000 = $75,000 – $75,000 = $0.00

This metric is a great metric to use when you are constructing your budget. Start with estimating your expenses, you then use that number to determine how many units you need to sell in order to cover your costs. If you feel that unit number is too high, then figure out how to lower your costs to get to a number that you are comfortable with.

It’s also a great metric to use when you want to figure out how many units above the breakeven point you need to sell to make a certain amount of profit. But that’s another post.

When does breakeven analysis come in handy?

When you are want to scale up your business and need to figure out how much more overhead you’ll need to take on in order to be able to support the increased sales volume.

When you’re thinking about a new hire, say an Operations Manager, and you want to figure out how many more units you will have to sell in order to justify their salary.

When you’re thinking about buying some new equipment or moving to a larger location this analysis will help you see how many units you’ll need to sell in order to make that worth your while.

When you’re thinking about starting a new product line and want to see if the numbers work or not.

There’s so much to talk about with breakeven point…let me know what’s on your mind about this in your business and I’ll be happy to help. Just hit me up in the comments below with your questions.

There are two types of metrics: evaluative and predictive. In other words, metrics can either look back to quantify past performance OR they can look forward to help you make guesses about future results based on past activity.

When setting up a budget for the next year, it helps to look at actual numbers from the past. In this case, we’ll be using the percentages of Owner’s Draw against Income.

Here’s the math: divide the actual Draw into the actual Income for each of the past three years. This gives us a percentage of Draw to Income for each year. Then apply that percentage to the projected 2017 income of $625,000 to get the high and low ends of a range of possible Draw for this coming year.. The actuals are in green and the projections are in purple.

projected 2017 income

$625,000

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rear view

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<– windshield –>

Year

Income

Draw

% Draw to Income

range for 2017 draws

2014

$500,000

$265,000

53%

$331,000

2015

$390,000

$137,000

35%

$220,000

2016

$370,000

$110,000

30%

$186,000

So what this is telling us is that the range for the Owner’s Draw is from $186k-$331k.

If you find these strategies helpful and want to know more, then hit me up in the comments below with your questions and I’ll be happy to answer them.

Then “heads up!” Second installment of 2017’s estimated tax payment’s due on June 15th, 2017

How do you figure out how much to pay?

There are two schools of thought about how much to pay and when. The IRS would like you to estimate your net income for the entire upcoming year, calculate the Self-employment (SE) tax and personal federal income tax on that projected amount, divide by four and pay in equal installments.

Not so much.

Here’s another way and the way I recommend: pay as you go. And, be careful, the due dates are wonky. The first is due the four months into the year, the same day as your prior year’s final taxes, the second is two months later, the third three months later, and the fourth four months later. Don’t ask me why, makes no sense to me.

The tax is based on your Net Operating Income from your Profit & Loss statement. The turnaround time is tight here to do it this way…just two weeks. This is yet another reason to stay on top of your bookkeeping.

A few things to keep in mind:

This applies to you if your business is what the IRS calls a “pass-through” entity. Meaning that your personally pay the taxes, the business doesn’t. If you’re not on payroll and are a sole prop or have an LLC, then this applies to you.

Medicare (MC) and Social Security (SS) taxes apply to 92.35% of your NOI, no the full 100%. This means the first 7.65% is not subject to SE tax

No limit on taxable MC income, but SS maxes out at $127,200 for 2017. Don’t get me started on the inequities of this. I think there shouldn’t be a limit. But I’m not in Congress.

What you are paying is a combination of self-employment tax and personal federal income tax, if the latter is applicable.

It makes no never mind if you have zero taxable income or a loss on your personal tax return (form 1040), SE tax still has to be paid. So even if you not sure if you will owe personal federal income taxes for the year, pay your SE tax as you go.

If you’re not clear on what your tax bracket is, go to last year’s tax return, form 1040. Divide the taxes your owed, line 56, into your adjusted gross income, line 38. That’s your tax bracket. Example, taxes owed: $5,690 divided into adjusted gross income: $50,006 = 11%. Use this percentage in your estimates for the current year.

Here’s an example of the numbers in action:

Payment Period

Jan 1 – Mar 31

Apr 1 – May 31

June 1 – Aug 31

Sept 1 – Dec 31

Due Date

4/15/17

6/15/17

9/15/17

1/16/18

NOI from P&L

$10,500

% exempt from tax

7.65%

$ exempt from tax

-$803

taxable amount

$9,697

Medicare – 2.9%

$281

Social Security – 12.4%

$1,202

Your Fed tax bracket

$1,067

total estimated tax due

$2,550

What if you haven’t paid your first installment for this year? Combine the first and second together and pay them both on the one voucher due 6/15/17.

Same concept goes for state taxes, if personal income taxes apply to you in your state.

Clear as mud? No worries, hit me up with any questions and I’ll be more than glad to answer them. I love to decode the complexities of the financial high priesthood for you.

Staying on top of your business numbers is like sitting on a three-legged stool. You need all three to make it work.

The most common question I get asked by my small business clients is: what should I be doing daily, weekly, monthly, quarterly, yearly in my business books?

If you do the following on a monthly basis, then you take care of the 95% of what you need to stay on top of your numbers.

Phase 1: Completeness

Enter ALL your transactions into QB and reconcile every bank and credit card account by the middle of the following month. Even if you’re not sure where to code something…shove it into Uncategorized Income or Expenses and sort it out in Phase 2.)

Once this phase is done and done well, it means that you have no duplicates or omissions in your books. You are sure that you have a complete record.

I talk to a lot of entrepreneurs about their financial systems and structures.

By the time they finally approach me they usually feel desperate for help.

Sometimes they’re not able to get a bank loan or line of credit because their financial statements aren’t up to snuff.

Or they feel stretched too thin and overwhelmed, and they aren’t even sure their bookkeepers are giving them correct statements and financial reports.
Or, they’re simply exhausted. They’ve stayed up late and worked more weekends than they care to admit, trying to learn QuickBooks; they feel like failures.

Do these situations ring a bell?

First, I want to assure you that you are not alone. And second, it doesn’t have to be this hard.

I’m a Virtual CFO, and I serve people just like you—smart, savvy business owners who are experts in their fields, yet they need support with their accounting and financial systems.

What is a virtual CFO? A virtual CFO, Chief Financial Officer, provides professional accounting and finance assistance to growing businesses that require a high level of expertise, but don’t yet have the growth or revenue to bring that role in-house. How does it work? I offer either an on-going partnership relationship or specific project-based assistance and support. I meet many of my clients via telephone, Skype, or on GoToMeeting; however, my local clients and meet in person, depending on their needs and locations.

The beauty of working with a virtual CFO is that you can work as much or as little with them as you’re needs and budget dictate. What kinds of things does a virtual CFO do?
My business is unique. I don’t offer cookie-cutter solutions to my clients. I understand that each business and business owner has individualized needs.

My services include, but aren’t limited to:
• Oversight of your bookkeeper ensuring you get accurate, timely and complete information
• Vetting and hiring your bookkeeper (if needed)
• Close collaboration with your CPA
• Vetting and hiring of your CPA (if needed)
• Ensuring you fully understand everything your CPA tells you
• Preparation of cash flow projections
• Working and problem-solving with your bank
• Determining pricing structures
• Reading, understanding, interpreting your financial statement
What can you accomplish with all this support?
Your Virtual CFO is your trusted ally. With her support, you can finally focus on your genius work—the work you love doing and feel called to do. You will be happier, have more time, and get better results.
Rather than throwing your hands up in frustration over QuickBooks, you’ll have more time for client work, idea generation, content creation, and networking—the stuff that actually brings you more money. In other words, you will be working on your business, not your books.

Isn’t it time you delegate the tasks that don’t bring you joy, clients or income? Isn’t that why you got into business in the first place?

If you have questions about how I work and the results I deliver to my one-on-one, private clients, please click here to set up time for a Financial Clarity Call. The call is free, and there’s no obligation.

I was reviewing a client’s year end financial reports yesterday and found $18k to add to his bottom line. IOW, the CFO financial operations and analysis work I did for him ADDED $18,000 in profit to his business.

And talk about return on investment (ROI): he DOUBLED his investment with me and this was just after our very first call!

Indeed, I have long held that cleaning up and keeping on top of your tracking and reporting increases a business’s profits. And now I have proof!

This is so great because this puts the lie to the traditional notion that accounting and finance are expenses to be kept to a bare minimum because they don’t bring in money like sales and marketing. In other words, accounting is a “cost center” while sales is a “revenue center.”

While sales and marketing bring in money to a business (and don’t get me wrong, they should), a hefty top line isn’t the be-all and end-all. It’s really all about how much you keep at the end of the day.

And just as important is good recording and accounting for those expenses. Money spent on good systems and financial oversight is an investment and adds to the bottom line.

So, as you look over your profit and loss statement (P&L) at year end, be on the lookout for any balance sheet transactions that got mistakenly applied to the P&L. Some common ones are:

repayments of loans,

owner draws,

income taxes (except if your company is a C corporation or taxed like one).

A good way to spot these is to look at year over year (YOY) reports. That is, this year and last year side by side. And I’m assuming here that last year’s numbers are clean. Any discrepancies will jump right out at you. For example, last year you had $500 in payroll taxes and this year you show $11,000. That’s a big jump if you didn’t hire anyone so those taxes shouldn’t be going up that high. A closer look reveals that income taxes that should have been recorded as “Owner Draw” (because you’re not a C corp) were recorded as an expense.

This outcome is why I love what I do. Crunching numbers is not boring or dry or dull. It’s exciting because of what good number crunching does: it clears up confusion, promotes peace of mind and makes money!

Need some help figuring out if your books are clean? Are you ready for the tax man? Would you like to see how much money you might have on the table? Let’s talk and see how getting your financial systems in shape will have a positive impact on your bottom line.